A weaker euro for a weaker Europe

What can be done to help the ‘crisis economies’ of southern Europe reduce their external deficits? The debate is often presented as a conflict between the deficit-burdened PIIGS – Portugal, Italy, Ireland, Greece, and Spain – and the eurozone’s current-account surplus countries, particularly Germany. But a new and more important imbalance has emerged in recent years: the PIIGS’ trade and services deficits with China, which suggest a possible solution to southern Europe’s economic malaise – a stronger renminbi.

Until 2004, the PIIGS’ biggest trade and services deficits were with the rest of the eurozone. But in 2005, their combined deficit with the rest of the world, at €37.2 billion, exceeded their combined deficit with other euro members by more than €4bn. Then, in 2008, before the worst of the global financial crisis hit, the PIIGS’ global deficit reached a record-high €116.5bn, of which €34.8bn was with China, surpassing their deficit with Germany for the first time – by more than €2bn.

Crucially, though the PIIGS’ combined deficit with Germany, the eurozone, and the world narrowed substantially over the next four years, their deficit with China remained huge – at €33bn in 2010 and €29bn in 2011.

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